The Commoditization of Physical Goods a.k.a. “If you’re still just making stuff, you’re in for a rough ride.”

Recently I posted an article on how car dealers are trying to improve the experience for their customers as a way of differentiating themselves from their competitors because, by and large, the huge differences in physical product quality and performance are now largely reduced to relatively small (from a historical perspective) differences.

The meaning of the tongue-in-cheek title is to put forth the proposition that the extent a company is trying to create value and improve its competitiveness by making a better widget (substitute anything here, a car, cellphone, hot dog, pair of jeans etc.) they will continue to see their margins shrink as they continue to become commoditized. In this context, it doesn’t matter if you have a brand or not. A branded physical product will only delay the inevitable erosion.

Embracing or creating “high-touch” (experiences that are usually face-to-face with employees and are experienced first-hand by the customer) areas is one of the ways to create a more defensible competitive advantage. For example, if two identically well-equipped and designed hotels went head-to-head, the only ways to compete would be to (a) cut prices (which erodes profits) or (b) offer a better overall experience which, in this scenario given identical physical amenities, means better interactions and service from the hotel staff.

The implication of this, if true, is that industries that traditionally have many employee-customer moments of truth have a huge opportunity (and need) to distinguish themselves on better a better customer experience (think airlines) while those still peddling the goods need to find ways to establishing a direct connection between their employees and their customers.

Apple, for example, has three axes of attack: product design (aside from copyright protection) is the least sustainable — competitors will and have mimicked their devices; their service ecosystem (the way in which their devices connect seamlessly into things like iTunes) is more enduring and defensible; and lastly, the product knowledge and service of staff in the Apple stores. In my argument, it is the 3rd and 2nd elements that are the most value-creating, in the same way that the actual products of Ikea are the most vulnerable while its system of logistics and its in-store experience are arguably its most valuable assets.